Why Rising Interest Rates Hurt Bank Stocks Instead of Helping Them

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Higher funding costs and unrealized bond losses on balance sheets have been effects.

For years, bank investors were itching for higher interest rates. They finally got them but it hasn’t gone as investors hoped.

“It worked because there was no competition on deposit rates,” Ramsey said. Even when rates climbed 2.25 percentage points between 2015 and 2018, banks weren’t pressured to pay their depositors more. That allowed banks to widen the spread between their interest-earning assets and interest paid on liabilities.

Beyond narrowing net interest income, banks have another problem: $558 billion in unrealized losses sitting on their balance sheets as of the close of the second quarter thanks to rapidly rising rates pushing down the value of their investment securities. If banks don’t pay their depositors more, they risk being forced to realize those paper losses if depositors flee all at once—a fate that led to the demise of Silicon Valley Bank, Signature Bank, and First Republic.

 

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